Environmental FInance
QUESTION The Murray-Darling is the longest river system in Australia, covering areas of 1 million square kilometres and ranked fifteenth in the world in terms of the lengths. The Murray- Darling river system has long played an important role in the Australian agricultural sector as well as in providing various ecosystem services and supporting biodiversity for a vast array of plants and animals. Changes in land use, water extractions and river management in the Murray-Darling Basin have increased pressure on the Basin's water resources, leading to significant concern over water quality and the status of ecosystem health. The federal government asked you to prepare a consulting report on the management of the river system and your tasks in this assignment are: (a) Make a list of THREE examples of key ecosystem services provided by the Murray-Darling Basin. Explain why you think the government should particularly focus on these ecosystem services. Categorize each of the ecosystem services based on the table provided in Module 1. (b) Discuss why these ecosystem services are unlikely to be provided at the efficient level when there is no regulation. Why does the market system often fail to provide the right price signal? What are the sources of market failure? (c) Provide THREE examples of market-based instruments (MBIs) that can be used to improve the provision of each ecosystem service you have identified in Part (a). Make sure that you cover both price-based and quantity-based MBIs. Discuss how the market price of the ecosystem service is determined through each of your MBIs. Overall, do you think that these MBIs work better than other policy instruments (e.g., command-and-control direct regulations)? Explain your reasoning. (d) The Murray-Darling Basin Authority has identified that climate change is a significant source of uncertainty and risk for the sustainability of the Murray-Darling river system. What are the potential effects of climate change on the ecosystem services you have identified in Part (a)? (e) The government is interested in the use of financial instruments, in particular catastrophe bonds and weather derivatives, as a risk management strategy to reduce environmental risks associated with climate change. Explain how these instruments can help the government to manage the environmental risks you have identified in Part (d). Discuss the advantages and disadvantages of each instrument. Essential Reading: *You MUST cite one of these papers in your report Grafton, R. Q., Pittock, J., Williams, J., Jiang, Q., Possingham, H., and Quiggin, J. (2014). Water Planning and Hydro-Climatic Change in the Murray-Darling Basin, Australia. Ambio, 43(8), 1082- 1092. Grafton, R.Q. and Wheeler, S.A. (2018). Economics of Water Recovery in the Murray-Darling Basin, Australia. Annual Review of Resource Economics,10, 3.1-3.24. Wheeler, S., Loch, A., Zuo, A. and Bjornlund, H. (2014). Reviewing the adoption and impact of water markets in the Murray–Darling Basin, Australia. Journal of Hydrology, 518, 28-41. Other Readings: Murray-Darling Basin Authority’s website (http://www.mdba.gov.au/) Chapters 4-5 and 8-10 in Markets and The Environment by Keohane and Olmstead (These were from the reading list for Modules 2, 3 and 4). Instructions The length of the assignment is 2,500 – 2,800 words (excluding references). The appropriate reference style for this unit is the Harvard style. Your capstone should use at least three print-based (i.e., not web-based) reference materials. You may use web-materials as well, but they should be substantive and credible. For example, do not use Wikipedia or online forum as a reference). Your assignment must be typed and double-spaced. Your assignment needs to be well-structured, i.e., it should have a clear introduction, main body and conclusion. Use section headings effectively to help structure your arguments and to improve the readability.